Portugal set for two years of recession

Caretaker: Jose Socrates Portugal's caretaker prime minister says he has reached agreement on a bail-out from the EU and IMF

Portugal's 78 billion (£70 billion) bailout is likely to send the beleaguered nation's economy into a deep recession for the next two years, it emerged today.

Official sources expect output to shrink by 2% this year and next as spending cuts and tax hikes bite. The nation, which plans to cut its deficit from 9.1% to 3% by 2013, also intends to pump 12 billion into its banks with funds from the rescue package.

Full details of the bailout deal, thrashed out by caretaker prime minister José Socrates, are yet to emerge but analysts said the country, being charged an eye-watering 9.1% to borrow for 10 years, was likely to pay a similar rate to Greece's 4.8%. The nation needs the funds to meet a 4.9 billion bond repayment on June 15. Socrates resigned in March after his parliament voted down spending cuts.

Lloyds Bank Corporate Markets analyst Charlie Diebel said: "We have not got a government and more worrying could be a kind of 'austerity fatigue', which we are starting to see in nations like Greece."